Utility spot pricing study : Wisconsin

Abstract

Spot pricing covers a range of electric utility pricing structures which relate the marginal costs of electric generation to the prices seen by utility customers. At the shortest time frames prices change every five minutes--the same time frame as used in utility dispatch--longer time frames might include 24-hour updating in which prices are set one day in advance but vary hourly as a function of projected system operating costs. The critical concept is that customers see and respond to marginal rather than average costs. In addition the concept of spot pricing includes a "quality of supply" component by which prices are increased at times in which the system is approaching maximum capacity, thus providing a pricing mechanism to replace or augment rationing.

This research project evaluated the potential for spot pricing of industrial customers from the perspective both of the utility and its customers. A prototype Wisconsin (based on the WFPCO system) and its industrial customers was evaluated assuming 1980 demand level and tariff structures. The utility system was simplified to include limited interconnection and exchange of power with. surrounding utilities. The analysis was carried out using an hourly simulation model, ENPRO, to evaluate the marginal operating cost for any hour. The industrial energy demand was adjusted to reflect the price (relative to the present time-of-use pricing system). The simulation was then rerun to calculate the change in revenues (and customer bill) and the amount of consumer surplus generated.

A second analysis assumed a 5 percent increase in demand with no increase in capacity. Each analysis was carried out for an assumed low and high industrial response to price changes.

In an effort to generalize beyond the Wisconsin data and to evaluate the likely implications of a flexible pricing scheme relative to a utility system with a greater level of oil generation, particularly on the margin, the system capacity of the study utility was altered by substitution of a limited number of coal plants by identical but with higher-fuel cost oil-fired plants. The analyses for the modified utility structure are parallel to those for the standard utility structure discussed above.

The results of the analysis showed that the flexible pricing system produced both utility and customer savings. At lower capacity utilization the utility recovered less revenue than it did under the present time-of-use rates. While at higher utilization it recovered more. Under all scenarios tested, consumer surplus benefits were five to ten times greater than were simple fuel savings for the utility. While these results must be evaluated in additional testing of specific customer response patterns, it is significant to note that the ability of the customer to choose his pattern more flexibly holds a significant potential for customers to achieve greater surplus--even if their bill may in fact increase. These results are discussed in detail in the report as are a number of customer bill impact considerations and the issues associated with revenue reconciliation.